The real reason Applebee's is dying (it's not what you think)

Applebee's was once the most recognized casual dining chain in America. 2,000 locations, $4.7 billion in sales. But then the people who were running it basically did something that led it to where it is today. Culturally irrelevant and getting totally crushed by Chili's. This video is the rise and fall of Applebee's. Oh, and by the way, thanks to Xero for sponsoring this video. More on them later. By the way, I turn each and every one of these videos into a one-page cheat sheet you can download to learn more. girdley.com/youtube. The story starts back in Atlanta in 1980. A husband and wife couple opened the very first Applebee's, except it wasn't called that. The original name was TJ Applebee's Rx for Edibles and something. I mean, it was just this horrible, like, postmodern apothecary name. Eventually nobody could pronounce it, just like I couldn't, and they changed the name to Applebee's. This was 1980, and casual dining as we know it didn't really exist. You either went to a steakhouse or a diner. There was nothing in between. It struggled to find a fit a bit,. But then they sold the whole thing in 1983 to a chemical conglomerate of all things called W.R. Grace. Then in 1988, the chemical company realized their mistake and sold the entire rights to Applebee's to a group of Kansas City investors led by a guy named Abe Gusten. And in 1989, they would take the chain public. Personal anecdote, I've probably watched this— walked this trail 100 times, and then I just decided to take a left. And holy crap, we have this like amazing Texas tree here. Like, look at this oak tree. I had no idea this existed. It's like something out of like Lord of the Rings or something. Insane. Anyway, back to the story. Guston's whole engine to grow Applebee's was franchising. Basically, you find somebody who's a good business operator, sell them the local rights to a territory, say like San Antonio where I am, and then sit back and collect royalties from franchise fees after they open up restaurant after restaurant. Seems perfect, right? Well, there's a downside to franchising, and that thing is around control. And suddenly you're buying yourself a bunch of business partners when you're a franchisor like Applebee's is. This idea would come back to haunt them later. As that decade went on, the positioning of Applebee's would prove to be brilliant. Whereas TGI Friday's was an urban fern bar out in the middle of, uh, suburbia, Tex-Mex was Chili's game, uh, basically Applebee's was everybody's neighborhood location. Despite it being a chain, they made it about local feel and feel good. In fact, the slogan for Applebee's during this time was "Feeling good in the neighborhood." Actually, it was eating good in the neighborhood. But anyway, you see what I'm saying? The menu was becoming what we today call Americana: riblets, fiesta lime chicken, baby back ribs, that kind of thing. And they rode the whole thing over the coming era of the 2000s to hit $4.5 billion in sales for Applebee's as a system by 2007. But it's important to remember, by this time, baby boomer parents who'd been the primary drivers of taking their families out on Friday nights to places like Applebee's their kids were growing up and they were aging out. And replacing them were Gen X parents and Millennial parents, and they had entirely different priorities. Millennial parents in particular have been some of the slowest to grow up in history— well, until subsequent generations came along, and they're delaying kids and marriage even later. But Millennials suddenly weren't having kids as early as previous generations were. The folks at Applebee's headquarters saw this happening and saw that the trends that had benefited them in the Baby Boomer parent era were going away, and Millennial, Gen X parents weren't going to be supporting them like they did in the past, and that led them open to the next thing to happen to the chain.

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And that's when IHOP Corporation— yeah, the breakfast and pancake chain— stepped in and spent $2.3 billion to buy Applebee's. And here's the crazy thing. IHOP was a fraction of the size of Applebee's. To make it work, they borrowed a whole bunch of money. $2.3 billion in debt was put on the chain, uh, the combined chain, which was basically, basically 4 times profits. And crazily, the CEO of IHOP at the time was a former Applebee's employee. Her name was Julia Stewart. She'd actually been a leading candidate to become CEO of Applebee's one day, but that board had passed her over saying that they didn't think she was ready yet. Remember how I said the new chain had a ton of debt on it? Well, Julia had to do something about it, and the first thing she did was go and sell off every single one of the remaining company-owned Applebee's stores. And the beauty of, say, something like I did on this channel around Panera, where you have some company-owned stores and some franchise stores, is it gives you balance and your control upon your franchises. And you can also go and when you own the stores, run experiments that you normally couldn't. But here was Applebee's making the same mistake Panera had made and selling off a lot of their locations to where they didn't control any stores anymore. They renamed the company from Applebee's IHOP, which I guess doesn't really roll off the tongue, to Dine Brands. And they did something pretty crazy. They financialized— financialized— they did financialization of their entire revenue stream. Normally, a franchisor like a McDonald's, they just sit back and collect royalties from their franchisees, and McDonald's also owns the real estate, which is really smart. But here, here with IHOP and Applebee's, what they were doing was turning around and turning their entire revenue stream into debt they could borrow against from Wall Street. That meant that no longer was thinking long-term what was going to happen to the brand. The number one priority would be to make sure those royalty payments were as big as possible and kept coming in as long as possible to pay down the interest and the payments on those bonds they had sold. Remember how I told you they had sold off all their locations and franchised everything? Well, that meant suddenly they didn't have control over the locations, and, uh, to get any changes done, well, they'd have to move at a glacial pace. It's a reality in business. Every time you make one decision, there are always trade-offs, and one strength that you have as a person always comes back as a weakness on the other side of it. That's just the way the universe works. It always stays in balance. And here, these financialization and control things, well, they had blowback as well and downsides. The 2010s went along, it was clear that Applebee's was struggling. I mean, why would you want to go there? I don't know, I haven't been there in years. We go to Chili's. Most people think that the upcoming chains like Panera or Chipotle are what killed concepts like Applebee's, but that's not true. Things like Texas Roadhouse and Chili's, they're thriving. And what happened is, as the 2010s got started, those millennials who had let the chain down by not having kids early enough. Well, suddenly Applebee's decided that they were panicked and they wanted to go after and chase millennials. Management went through and forced a bunch of capital expenditures onto the franchisees. New wood-fired grills, new menus, new look and feels inside of the venues themselves. It was easy for them to do that. It was $40 million they weren't going to spend. They forced it out on the franchisees and told them they had to do it. It didn't work. And in 2017, same-store sales went down 5%. In Q3 of that year, they went down 8%. The stock was down 50% in 2017. By trying to copy things like Chipotle and Panera, they'd alienated their core customer base and actually what made them good. It was all based on a fundamental misunderstanding. Your millennial who wants to go into Chipotle for a burrito bowl isn't going to suddenly walk into, you know, Applebee's for TV watching, sports, and mozzarella sticks and maybe a Bud Light. It's not going to happen.. And they were doing it all with precisely the wrong generation. Millennials love the feeling of being part of an inclusive group where they're part of a crowd and they want it to feel genuine. And here it was, Applebee's trying to be something it wasn't. Seeing these results in 2017, the board of management panic. The CEO gets fired. They bring in a guy named John Siminski. Hopefully I pronounced that right. Bring in their old CMO. And the whole plan is to go back to their roots as a neighborhood bar and grill. Their first plan is a thing called the Dollarita, which is $1 margaritas. And basically push all of that out on franchisees. And people love it. $1 margaritas are a hell of a deal. And same-store sales bounced by 4%. But there's a problem with these discounts, and it all stems from the way they're structured. Remember, they don't own any of these stores. So selling $1 margaritas at a loss, that doesn't cost the company much because they still collect franchise royalties on the whole thing. But it hurts those franchisees. Well, a lot. We saw this same situation happen on another video on this channel around Subway, and it all was just around the misalignment of incentives. Here was headquarters wanting to get as many royalties as possible while the franchisees wanted to make money. And those two things were suddenly at odds. It was about to get worse. In 2018 and 2019, John would go out and try to get franchisees to do a bunch of remodels, and they were done with it. They'd seen basically all these things being handed to them and they revolted. 135 franchisee stores closed in 2017, another 80 in 2018. Basically, the part of the revolt was that these guys who were the franchisees and business partners with Dine Brands They were going bankrupt. March 2018, the second largest franchisee owning 159 locations declared Chapter 11. All a sign that things were going horribly wrong for the chain. And remember how I told you that each individual Applebee's had been a reflection of its local community, showing local memorabilia and stuff like that to make people feel connected to the brand? Well, by the 2000s, they basically created decor in a box. Every single one of these, like, Applebee's looked exactly the same. It was like a bad version of Pottery Barn. It's nasty. Through this period of the 2000s, they burned through 5 different CEOs in 20 years. It's the train— chain made these decisions, then each time brought in somebody else to try to clean it up. And then as 2020 came in, COVID happened. Year 2020, remember COVID started March 2020, same-store sales would be down 26% at Applebee's. People definitely couldn't go into bars.. And then a crazy thing would happen to them in 2021. A country singer would release a song that basically went about, uh, describing how country people would get fancy, like going to Applebee's. And in Q3 2021, where people are hungry to get outta the house and we've got the whole mask thing kind of figured out, same store sales actually went up by over 10% during that Q3 2021. And then Q4, basically they finished the year with foot traffic up by some regards 20% or more. What it showed was that Applebee's actually had a brand. It was blue collar and people were proud to go out and eat an Oreo shake with, you know, with like a bourbon steak or whatever the name of the thing is on the Applebee's menu. As you can tell, my Whole Foods eating, clean eating self is not an Applebee's customer. So I apologize for mispronouncing everything. Applebee's even licensed the song and started to use it to promote the brand. But here's the crazy thing to recognize in all this and how dysfunctional they've become. Was that the singer's team was the one that actually reached out to Applebee's to license the song, not the other way around. Like, what are these guys doing? Like, call the guy. By 2024, chainwide sales would be down nearly 5% again. Seemed like the people in headquarters at Applebee's didn't know that they had a soul or even what one was. If you want to understand how misguided the leadership at Applebee's had become and how much they missed the plot, you only have to look across the street. And another chain, and that one is Chili's. Chili's has the same customer base, same footprint, same almost everything, same suppliers in some regards. But suddenly in 2024 and 2025, Chili's is growing by double digits, 10, 15% per store. Applebee's in that time is losing market share and same store sales are shrinking 4 to 5%. That's not just competition. It's a total beatdown. Chili's does 3 things fundamentally differently. The first thing is their CEO has cut 25% of their old complicated menu. They just went out and did it and told everybody they were going to. And it's because they have some franchises and also they own their own stores. But when Applebee's tried to do the same thing, the franchisees, they weren't interested. And to make that kind of change because of their structure would take forever. So Applebee's has a really complicated menu. Number 2, Chili's has invested in their food and been really smart about competing with everybody. There are things like the Big Smasher and stuff like that that's designed to compete with McDonald's and fast food. And Applebee's, well, they've let their menu stay stagnant. Number 3, I guarantee if you name some of the promos that Chili's is doing, you understand what they are. Triple Dippers, 3 For Me. Applebee's has the same stuff, but nobody can name them. Chili's parent company, Brinker International, owns 83% of their locations. Applebee's, exactly the opposite. They own basically zero. So when you need to change the menu, you can do it in 6 weeks if you're Chili's. You can move fast as the world changes fast around you. Applebee's has to get permission from all their business partners, aka the franchisees. Behind all of that, remember the bonds and the money that they owe to the debt holders? That's all backed by franchise fees and the royalties that are coming in. And the people who are lending money to Applebee's, they have no incentive to actually change the restaurants. They just want to make sure the franchisees keep paying the bills. That's why today Applebee's is basically culturally irrelevant. They're shrinking. They only have 1,500 locations, down from nearly 2,000, uh, and their stock price is similarly getting beaten down to the ground. Analyst put the situation for Applebee's perfect. He said, he said, they're just there. They're not good at any particular thing. They're not fast like fast food. They're not good like fast casual. They're not unique in any regards. Basically, they just exist. And as I've talked about on this channel a lot, if your business is not great at any one thing, basically that's a path to irrelevance. The middle is a great place for businesses to go and die. If you own a business, you need to be able to answer the question of why would somebody choose us? Like, what is the compelling reason to shop at our place? For everybody else, they have an answer, and Applebee's doesn't. All right, it was too wet to walk on the trails today, so I'm out here on the greenway. If you enjoyed this video, let me know. It makes me feel good in the comments and encourages me to make more. Catch you next time.